World Class Supply Base

Supplier selection and evaluation are too often neglected by procurement professional.
However, they are the most important components of developing a world class supply base.

Why need world class supply base?

- Supply base is a pool of capable of providing materials, products and valued services to
an organization
- Recognized as one of the key players within the organization’s supply chain
- Increasing reliance on suppliers to become more competitive

Supplier selection process

1. Recognize a supplier selection need
- Need to select new suppliers due to poor performance of existing lots
- When renewing expiring contracts
- When need to outsource
- Need a supplier to participate in new product development
- When implementing global strategies
2. Identify supplier requirement (the most critical step for selecting suppliers to meet certain
needs)
- Define the selection criteria which the suppliers will be evaluated
o Define correct attributes
o Define best weights
o Define critical requirement
3. Determine supply strategy
- Single or multiple source strategy
- Longer-term contract
- Local or foreign supplier preferred?
- Any particular value add service is expected from this supplier
- Use the PORTFOLIO MATRIX
4. Identify potential supplier
- Find the new suppliers from internet, marketplace and trade journals
- Some items to consider in the identification process
o The new items
o The basic or complex items
5. Shortlist the potential suppliers
- Liquidity ratios: short-term cash need; current ratio and quick ratio
- Leverage ratios: capable of paying its debt obligations; debts to asset. Times interest
earned, fixed charge coverage
- Activity ratios: effective assets management, inventory turnover, average collection
period, returns on net assets
 - Productivity ratio: rate of return (supplier earning); gross and net profit margin, return on
equity, return on investment
6. Conduct formal evaluation process
- Suppliers assessment is becoming more complex (increasing demand on performance and
to avoid switching suppliers)
- Site visit remains an important part of selection process
- As if doing a due diligence
- Check list
7. Select supplier and reach agreement
- Establish an agreement
- Like hiring, there is guarantee that selected supplier will be successful
- View this as beginning of the supplier-buyer relationship

Optimizing Supply Base: having the right mix and number of suppliers to maintain
Objective: create a supply base that is perfect, effective or functional as possible

How many suppliers should I have?

Reasons for single sourcing
- Collaborative relationship leading to greater
responsiveness, higher quality and improved
products
- Greater economy of scale
- Reduce administrative and ordering cost
Reason for multiple sourcing
- Competition leading to lower price and better
service
- Reduce risk of supplier dependency
- Learn from different suppliers
 Multiple strategy: if the firm’s strategy is multiple
sourcing, what is the best number of suppliers? It
will depend on:
o Volume and frequency of purchase
o Criticality of products
o Availability of qualified suppliers
o What kind of resources do you have?

Benefits and Challenges

Benefits: Challenges:
- Opportunity to develop closer relationship - Selecting the wrong suppliers
- The supplier reduction process gets rid of non- - Cutting the supply base too deeply or quickly
performing vendors to strengthen supply chain
- Easier to pursue leading edge SC process that
could lead to competitive advantage
- Reduce administrative costs